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Tesla Solar Singles – Raise the Roof

When Elon Musk announced late last year that Tesla would manufacture solar roof shingles, it was not clear whether the cost would be competitive. Recent announcements suggest it will be. For new roofs and replacement roofs, the decision should be clear: if they cost the same as shingles or slates (maybe less), why would they not be the choice? The question is whether the electricity savings justify the cost for roofs that still have some design life remaining.

Tesla is building Gigafactory 2 in Buffalo New York to produce both traditional solar panels and solar roof shingles. Two varieties are available for installation now; another two varieties will be available in 2018. Production initially will be in California and will move to Buffalo when the factory is complete. (Tesla broke ground on Gigafactory 1, in Sparks, Nevada for the production of the upcoming Model 3 vehicle and for the production of batteries in 2014).

Tesla’s website provides a handy tool using Google’s solar project to determine, based on address, what the appropriate mix of solar to non-solar roof tiles should be. It estimates costs and savings, making assumptions about electricity consumption, the tax credit available and, if required, financing costs.

If a consumer chooses to finance the roof cost, the benefit of the tax credit will go immediately to the financing party – Tesla – and be factored into the financing rate.

Financing creates another wrinkle in the sale of the property, but this is not a new issue.

Tesla is also selling batteries to permit storage of the energy produced for use during periods when the panel are not producing energy – nighttime for example. The savings shown on the Tesla site do not factor in any benefits that may be available by selling any excess energy produced back to the grid – the so-called net metering. Net metering is available in 41 states currently.

Visionary CEO?

Musk is, without a doubt, a visionary: cars, space and solar panels are all substantive accomplishments. Some, however, consider him to be a 21st-century P.T. Barnum. Which is it?

Tesla receives a lot of tax subsidies. California, Tesla’s home state, allocates credits in the form of zero emission vehicle credits (ZEVs) to manufacturers producing zero emission vehicles. Currently, Tesla is the only manufacturer eligible for ZEVs. California requires all auto manufacturers to produce a certain – arbitrary – number of zero-emission vehicles or to purchase the equivalent in the form of ZEVs. According to Tesla’s most recent annual report, it received $302m, $168m and $216mn of regulatory credits in 2016, 2015 and 2014 respectively. While not an insignificant number, these credits represent an average of around 5% of Tesla’s revenues for the past three years.

$302m is what Tesla received in regulatory credits in 2016

Tesla also benefits from local tax incentives for building factories in areas that are keen to see the additional jobs. This, however, is no different from many manufacturers – auto and others.

Tesla has been accused of benefitting from ‘crony’ capitalism and of producing products that are of no interest to consumers absent the tax benefits. The products may not, according to critics, even be produced in the first place if Tesla itself did not receive the tax handouts mentioned above. Tax incentives of $7500 per vehicle, attractive while they last, will phase out after the sale of the 200,000th vehicle (probably sometime in 2019).

Why Pick on Tesla?

Tesla is not the only company or industry to receive substantial benefits from government tax policy.

Over the past fifteen years, corporate tax subsidies, largely in the form of tax credits and grants to the renewable energy industry, have amounted to approximately $68bn. Federal loan or bailout aid over the same period has amounted to $17.8trn, of which Bank of America, Citigroup, Morgan Stanley and JP Morgan Chase received $3.5trn, $2.6trn, $2.1trn and $1.3trn respectively.

The private equity industry enjoys a benefit of around $2bn per annum from the favourable treatment of carried interest.

The government must make choices in tax policy. Some of those choices involve decisions that could be described as industrial policy. Generally, the position of this author is that private market is better equipped to make decisions regarding the allocation of resources. It does a better job and tends to make smaller mistakes. Solyndra is a good example of government folly. No doubt.

While hard to find a clear government policy on any industry, including the energy industry, inferences can be made. The government appears to have a significant interest in the financial services business. It also appears to have a clear interest in the renewable energy business.

Conclusion

It is often said that the US is not producing things anymore and is becoming increasingly a service economy. This complaint is a large part of the trade surplus/trade deficit discussion. If the US does not produce ‘stuff’, ‘stuff’ has to be imported. It is not hard to understand why the government is interested in promoting the emergence of a company such as Tesla.

So, P.T. Barnum or visionary? The case for visionary is compelling. Electric cars that look great, accelerate quickly – very quickly. Rockets that can be re-used are exciting too. Solar panels that look like traditional slates have a compelling aesthetic; electricity savings make a compelling economic case. Tesla’s tax subsidies are not greater than banks, renewable energy companies, real estate and insurance companies. Why the bad press?

One thought: envy. It is not attractive and it is not the best America has to offer. It is not why immigrants such as Musk come to America.